If supermarket profitability is broadly comparable across the Tasman, why do New Zealanders often pay more for groceries — and why hasn’t Aldi entered our market?

In Part 1 of this series, Do NZ Supermarkets Really Make $1 Million a Day in Excess Profits?, I examined the Commerce Commission’s widely quoted claim that New Zealand’s major supermarkets earned about $1 million a day in excess profits.

One of the more interesting findings was that New Zealand supermarket returns were not particularly unusual when compared with those earned by supermarket businesses overseas. The Commission’s 2022 study found that New Zealand’s major supermarket operators earned an average return on capital of approximately 12.9%, compared with around 11.8% for its international supermarket sample.

Australian supermarket operators also report substantial returns on capital, although accounting differences make direct comparisons difficult.

This raises an important question.

If supermarket profitability is broadly comparable across the Tasman, why are groceries often more expensive in New Zealand?

And another question that I believe deserves considerably more attention:

If New Zealand supermarkets are earning unusually high profits because of insufficient competition, why hasn’t an experienced international discount operator such as Aldi entered the market?

The answers may tell us more about the underlying economics of the grocery sector than the headline figures on supermarket profits.

First, are Australian groceries actually cheaper?

Not necessarily.

Individual products and shopping baskets can be cheaper in Australia, but the results vary depending on the retailer, product selection, exchange rate and tax treatment.

A 2025 comparison commissioned by Foodstuffs North Island, for example, found that a selected basket of everyday products was cheaper at Pak’nSave than at the Australian retailers examined, after adjusting for currency, taxation and pack sizes.

As a supermarket-commissioned comparison, it should not be regarded as conclusive evidence about grocery prices generally.

Nevertheless, it demonstrates why broad statements about Australian groceries being cheaper require qualification.

The more useful question is what drives price differences wherever they exist.

1. GST: a substantial difference before supermarkets make a cent

New Zealand charges 15% GST on almost all groceries. Australia exempts most basic foods, including fresh fruit, vegetables, bread, milk, eggs and meat, from its 10% GST.  Consider an identical basket of basic groceries costing $100 before tax in both countries, expressed in the same currency. In Australia, that basket could cost $100. In New Zealand, it would cost $115 without adjusting for currency differences.

That’s a 15% difference without any difference in supermarket profitability, efficiency or competition.

Not every grocery product is GST-free in Australia, so the actual impact depends on what consumers purchase.

But GST is one of the clearest and most measurable contributors to differences in checkout prices.

2. Economies of scale: Australia’s enormous advantage

Australia has approximately 27 million people compared with New Zealand’s 5.3 million. That difference affects almost every part of the grocery supply chain. A supermarket business supplying a much larger population can spread the cost of distribution centres, technology, purchasing systems, administration and marketing across significantly greater sales volumes. Manufacturers also benefit from larger production runs, more efficient equipment utilisation and greater opportunities for automation.

The result can be a lower cost per product.

And here’s the important distinction:

An Australian supermarket can sell products more cheaply while earning the same, or even a higher, return on capital than a New Zealand supermarket.

Profitability is influenced not just by selling prices, but by operating efficiency, sales volumes and the capital required to run the business.

This is why supermarket profitability alone cannot explain international grocery-price differences.

3. The Aldi question: if profits are excessive, why hasn’t it entered New Zealand?

Aldi is one of the world’s most successful discount supermarket operators. It has established a substantial presence in Australia, where its low-cost operating model and private-label product range provide an important competitive alternative to Coles and Woolworths.

Yet Aldi has not entered New Zealand.

There have been reports of Aldi considering the New Zealand market, and more recent reporting indicates that the company has no current plans to establish operations here.

That raises an interesting commercial question.

If New Zealand’s supermarket sector is generating unusually high profits, wouldn’t an experienced, well-capitalised international operator see an attractive investment opportunity?

After all, Aldi has the expertise, purchasing relationships, systems and operating model required to compete with established supermarket chains. Why wouldn’t it pursue a share of those supposedly excessive returns?

The answer may lie in the distinction between the profitability of an established operator and the returns available to a new entrant.

An investor doesn’t enter a market simply because existing businesses are profitable.

It assesses the capital required, the likely operating costs, the time needed to establish market share and the returns available relative to alternative investments.

For Aldi, entering New Zealand could involve substantial investment in stores, distribution facilities, supplier arrangements, staffing, technology and brand development.

It would also need to achieve sufficient sales volume to make its discount operating model commercially viable.

Aldi could be highly competitive in Australia, yet conclude that the economics of establishing a comparable operation in New Zealand are unattractive.

This possibility reinforces the importance of market scale, purchasing power and distribution efficiency.

However, there is another explanation.

High barriers to entry can discourage new competitors even where established businesses are earning attractive returns.

The Commerce Commission has identified difficulties accessing suitable supermarket sites, wholesale supply and other infrastructure needed to compete effectively.

Those barriers can protect existing operators from competition.

Consequently, Aldi’s non-entry doesn’t establish that New Zealand’s grocery market is sufficiently competitive. But it does challenge a simplistic assumption that high profits earned by existing supermarkets necessarily represent an equally attractive opportunity for new entrants.

And it raises a question worth investigating:

Has Aldi stayed out because New Zealand’s underlying grocery economics are unattractive, because the barriers to entry are too high, or because of a combination of both?

Without understanding Aldi’s actual commercial assessment, we cannot know. But the answer could provide valuable insight into which supermarket policies are most likely to succeed.

4. Manufacturing and purchasing costs

New Zealand is an efficient producer of many agricultural products, particularly dairy and meat. However, we have a relatively small domestic market for processed and manufactured foods. Many packaged grocery products are imported or produced in comparatively small volumes. Australian manufacturers can often achieve lower unit production costs through larger production runs, greater purchasing volumes and more extensive manufacturing infrastructure.

Australian supermarket operators may also obtain more favourable purchasing terms because of the volumes they buy. These advantages can reduce the price supermarkets pay for goods before they reach the shelves. That is a genuine cost advantage rather than simply a difference in retailer profitability.

5. Distribution and geography

New Zealand has a relatively small population spread across two main islands.

Products must be transported between ports, distribution centres and stores, often over considerable distances relative to the volumes involved. Australia has enormous geographic distances too, particularly outside its major cities.

However, its largest metropolitan markets provide much greater concentrations of consumers, supporting highly efficient, high-volume distribution networks.The relevant measure isn’t simply how far groceries travel.

It’s how much it costs to deliver each item to the supermarket shelf.

Higher distribution costs can result in higher prices even when supermarket operating margins are comparable.

6. Competition: important, but how much does it explain?

Australia has Coles and Woolworths, but also Aldi, IGA and other grocery retailers.

Aldi’s discount model provides an additional competitive constraint, particularly on everyday grocery prices.

New Zealand has Pak’nSave, New World, Woolworths, Costco and smaller operators, but the two major supermarket groups still account for more than 80% of the national market.

The Commerce Commission has identified significant barriers to entry and expansion, including access to suitable sites and competitively priced wholesale supply.

Those concerns are legitimate.

Greater competition can put pressure on margins, improve efficiency and encourage innovation. But competition does not eliminate the underlying costs of manufacturing, purchasing, transporting and selling groceries.

A new supermarket entrant in New Zealand would still face many of the structural disadvantages of operating in a smaller market.

The question is how much of any price difference is attributable to inadequate competition, rather than the higher underlying cost of supplying groceries in New Zealand.

That requires more than comparing supermarket profit margins.

7. Other costs of doing business

Wages, commercial property, electricity, insurance, compliance costs and exchange rates all influence grocery prices. These costs can differ substantially between countries.

Some may favour Australia, while others may favour New Zealand.

Exchange-rate movements can also materially change the apparent price difference between otherwise identical products. The relevant measure is the total cost of supplying and selling each product, not simply whether one country has higher wages or property costs.

Can we estimate the relative impact of these factors?

We can illustrate how differences might arise, although establishing their actual contributions requires detailed price and cost data.

Consider a hypothetical comparison in which an Australian grocery basket costs NZ$100 after currency conversion, while an equivalent basket costs NZ$115.

That gives us a $15 price difference to explain.

If 60% of the Australian basket consists of GST-free basic foods, the tax difference alone could account for approximately $9, assuming identical pre-tax prices.

That leaves $6 potentially attributable to differences in purchasing costs, manufacturing, distribution, retailer margins and other operating expenses. This is not an estimate of the actual trans-Tasman grocery-price gap.

It demonstrates why we need to separate taxation and underlying supply costs from retailer profitability before drawing conclusions about what causes higher prices.

Without a properly matched basket and comparable operating-cost data, assigning precise weightings to the remaining factors would be speculative.

What does this tell us about the $1 million-a-day excess-profit claim?

Returning to Part 1, the Commerce Commission estimated that New Zealand’s major supermarkets were earning approximately $365 million annually above its higher estimate of their cost of capital. Even if we assumed that entire amount disappeared and every dollar was passed directly to consumers, it would represent approximately 1.7% of a $22 billion grocery market.

For a household spending $250 a week, that equates to around $4 in weekly savings.

That’s worth having.But it illustrates why reducing supermarket profits alone is unlikely to resolve New Zealand’s grocery affordability problem.

Importantly, the Commission’s international analysis found that New Zealand supermarket returns were broadly comparable with those of overseas operators.

That doesn’t prove our grocery market is sufficiently competitive.

But it does suggest that the difference between Australian and New Zealand grocery prices cannot simply be attributed to unusually high New Zealand supermarket profitability.

Aldi’s apparent decision not to enter New Zealand adds another dimension.

If established supermarket profitability is genuinely exceptional, but an experienced international operator doesn’t see a sufficiently attractive investment opportunity, we need to understand why.

That question should be central to any serious discussion about encouraging new competitors.

What does this mean for government policy?

If the objective is genuinely lower grocery prices, policies should address the factors that actually drive those prices.

Removing GST from basic foods could deliver a direct reduction in the tax component, although at a substantial cost to government revenue.

Encouraging another supermarket competitor could put pressure on prices and improve efficiency. But a new entrant would still face New Zealand’s relatively small market, distribution costs and substantial establishment investment.

Breaking up existing supermarket groups might increase the number of independent operators, but could also reduce purchasing power and economies of scale.

Improving wholesale access and removing barriers to entry could allow new and existing retailers to compete more effectively without unnecessarily duplicating existing infrastructure.

And improving productivity and supply-chain efficiency could reduce the underlying cost of groceries regardless of which supermarket sells them.

These policies are not mutually exclusive.

But their likely benefits, costs and unintended consequences should be assessed rather than assumed.

The question we should really be asking

The supermarket debate has become heavily focused on how much profit the major operators earn.

But a more useful question is:

What would groceries cost in New Zealand if we had an efficient, genuinely competitive market, after properly allowing for our taxation, population, geography and cost structure?

That is a much better benchmark for evaluating supermarket policy. It recognises that supermarkets need sufficient returns to maintain their businesses, invest in infrastructure and attract capital. It also recognises that consumers should benefit from effective competition and operating efficiencies.

The Commerce Commission has identified legitimate concerns about competition. Those concerns deserve attention.

But competition is only part of the equation.

Aldi’s absence should encourage us to ask whether the real challenge is simply a lack of competitors, or whether New Zealand’s underlying market economics make it difficult for new competitors to operate profitably at the prices consumers want.

Those are not necessarily alternative explanations. Both may be contributing.

If we want sustainably lower grocery prices, we need to understand the entire cost of getting food from producer to consumer — not simply focus on the profits earned at the supermarket checkout.

In Part 3, I’ll examine the supermarket policies being proposed by New Zealand’s political parties and consider how each could affect grocery prices, operating costs, competition and investment.

Ivan Tava

Sources and further reading

• New Zealand Commerce Commission — Market Study into the Retail Grocery Sector, March 2022.
• Commerce Commission — Annual Grocery Report 2025, released June 2026.
• Foodstuffs North Island — International grocery-price comparison, 2025.
• New Zealand Initiative — Commentary on Aldi’s reported consideration of entering the New Zealand market.
• Reporting on Aldi’s position regarding New Zealand expansion, 2025–2026.
• Australian Taxation Office and Inland Revenue NZ — GST treatment of food.
• Coles Group and Woolworths Group — Published financial reports.